Have Publishers Shot Themselves in the Foot With Costly Ebooks?

What if the major book publishers inadvertently shot themselves in the collective foot by raising ebook prices to protect their paper book business? And in the process, hurt their 2015 profitability compared to where things stood before the ebook price hikes?

Managing price elasticity over time and by product is one of the most difficult jobs of any marketer. It’s one thing if we are talking about what to price Tide detergent for this week at Walmart and Rite Aid and quite another when talking about the same product delivered in multiple formats, which is the case for books.

Before ebooks came on the scene, publishers were practicing a smart strategy based on the core discipline of customer segmentation. No matter what the product or service, customers break into three main buckets: avids (early adopters), mainstream, and laggards. This segmentation system is most relevant in technology adoption, as wonderfully detailed in Geoffrey Moore’s important work done in the 1990s. His books Crossing the Chasm and Inside the Tornado are two of the most important marketing books we have to help guide our segmentation strategies.

The age-old publishing strategy, which was under control before the advent of ebooks, was a smart one where hardcovers, trade paperbacks, and mass market paperbacks (where warranted) were timed around customer segments for release. The avids need to be the first on the block to own whatever the passionate category may be for them, so for book avids, they will pay more for a hardcover, which is their only option at product launch using the time-tested strategy. Then the much larger mainstream segment comes onboard a year or so later with the trade paperback release, paying a price that seems appropriate to them. Lastly, along stumble the less important laggards, often driven by tie-in movies that encourage them to pick up the mass market special edition. Many laggards do not pay for their books at all but read them as pass-alongs. What they read (and when they read it) is far less important to them than for the other two segments.

Moore’s term “crossing the chasm” referred to the difficulty in moving from the early adopters to the mainstream and then laggards. (You can’t get to the laggards if you don’t cross to the mainstream.) Early adopters have different needs than the mainstream. Different personality profiles. They are not price sensitive so will pay more. They enjoy experimenting, fixing, and improving products. In technology, they are often beta testers. They have an emotional need to influence others with their expertise. “Oh, you simply must read Normal Family by Don Trowden,” they might say. Or “I would never read Harper Lee’s new novel as it wasn’t meant to be published.” Early adopters are highly opinionated and, arguably, more intelligent than the rest of us!

The mainstream is influenced by these early adopters but they are far more practical. They actively do not want to be the first to try a new product. They rely on reviews. They are more easily influenced than they might admit. And they are price sensitive. Reading that new novel as a hardcover is simply not an option as they won’t pay $28 for a book. They can wait. And paying $12.95-$14.95 for an ebook seems too high.

So the big question is how many people wanted to read Book XYZ but put if off due to price hesitation and never actually “got there”? Maybe they watched Netflix instead. Excellent retailers conduct exit interviews to find out why someone went into the store to buy a product and left without it. I don’t believe publishers have this data. I’m not sure Barnes & Noble does either. I think Amazon might.

The publishing industry was managing customer adoption cycles well before ebooks came on the scene. As a new digital download item added to the various print options, there was and is strong price resistance less determined by the paper editions and more by the overall competition among all digital entertainment content. Life, and business, take place in context. The old adage applies here: “People buy expectations.” These expectations exist around what the product will do and also what it should cost. Imagine coming upon that Tide in the supermarket and being asked to pay $18? Or seeing it for $5 on sale at Walmart and $12 in the regional supermarket chain next door? This creates buyer mistrust. Delays purchasing. Bad.

We don’t yet have publisher year-end financials but my hunch is the minor unit gains realized in print last year will not offset the significant losses in ebook sales, which deliver better margins. Many cheer about this increase in print, sighing in relief, yet do they understand the impact on the bottom line of those lost ebook sales? And it seems likely those gains were achieved through sales of four or five titles. What about all the other midlist authors? Debut novelists? Who were those former ebook buyers? Were they more likely to be laggards? Mainstream book buyers? One-time purchasers who gave it a try when the ebook was in front of them at the right price at the right moment the year before? Was Amazon correct in pushing for $9.95 as the ideal starting price for an ebook? Did they create new customers for publishers that the publishers in turn have now pushed away?

I predict publisher profitability will be hurt as a result of mismanagement of this new product mix that now includes ebooks. Lost opportunity. Is that opportunity shifting outside the publishing industry to self-publishing and others, where the prices seem appropriate to the less engaged mainstream shoppers? What if this happens? What do you think the industry response will be?

Remember. One doesn’t put top-line sales in the bank. Just profits.